The danger of underemployment …

The US Bureau of Labor Statistics released underemployment data for the US overnight. The results are disturbing and follow the same trend that is now common in Anglo countries – these economies, even in good times are increasingly generating marginal employment with low pay and job security, and, most importantly, deficient hours of work relative to the preferences of the workforce. But underemployment presents an added danger as we enter this current downturn.

While underemployment in Australia is now higher than official unemployment (but not for long), the US Bureau of Labor Statistics reports that there were about 7.8 million part-time workers who would rather be working full-time as of January which is a huge 65 percent increase in the number over a year earlier. Firms are clearly trying to trim hours first before they sack the workers to see if they can ride through the revenue falls. This is the first demand-side adjustment that occurs along with scrapping full-time jobs. So many workers will be offered reduced hours, four-day weeks and similar arrangements as the firms contract.

I have written extensively about this problem. One aspect that is not often appreciated as we head into this downturn is that this will be the first major negative cyclical event that we have experienced where underemployment will be a factor from the outset. Involuntary part-time work was not a major issue as we went into the 1991 recession. That recession saw underemployment spiral upwards and it has never recovered (see earlier blogs) but that happened during the downturn.

The second major difference this time is the huge debt burden being carried by the household sector which was absent in 1991. The workers are more than ever on the precipice of financial disaster and small variations in employment conditions will be more significant this time around than in the past.

During the growth phase, workers have been scraping for every hour of paid work they can get to service their massive debts. Yet the incidence of high underemployment (more than 600,000 in Australia) demonstrates that the policy framework failed to deliver outcomes that met the desires by workers for extra working hours. The major culprit has been the Federal Government who insisted on running such obscene surpluses that aggregate demand has never been allowed to reach the levels sufficient to fully employ the available labour force.

So we start the current downward spiral with huge underutilised labour resources being embodied in our part-time workforce (and the 500,000 or more unemployed). And, to exacerbate that vulnerability, the same workforce is precariously hanging onto solvency under the strain of their massive debt holdings as their wealth gets diminished by the day due to the collapse of the financial system.

The problem now is that as the firms cut back hours further – workers will take home less money – and go closer to bankruptcy. This becomes a vicious cycle because as workers suffer loss of earnings the proportion of discretionary income falls. They cut back on all spending other than the nominal obligations they have to the debt merchants. Ultimately, this squeeze becomes impossible and default and home loss follows. I predict this will be a much bigger part of this downturn than occurred in 1991 or before.

The problem is compounded by the huge debt burden because the underemployed don’t have much to fall back on – they have “maxed-out” credit cards, have huge mortgage payments and even a few less hours per week for some households will be highly problematic.

The prospects for older workers are also bleak given that the crisis has flushed out significant portions of their super fund entitlements. Some, who were victims of the shonky financial planning industry have lost all. But all of them do not have enough time to recoup their losses.

Personal risk management requires savings. The only way the non-government sector can save overall is for the government sector to be in deficit. That is just a matter of national accounting. As households try to save more, firms will cut back working hours even further. The only sector that can remedy the spending gap is the government sector. They must run bigger deficits than they are contemplating at present.

As an aside, tomorrow I am presenting a Keynote speech at a conference in Sydney on ethical conduct in the public sector. My contention is that our Federal government has delivered a failed state because it has behaved unethically by refusing to use its policy capacity to deliver full employment – an obligation that it is duty bound to honour under a number of international treaties, conventions and covenants. I might post a summary of my argument on Friday if I get some time.

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    2 Responses to The danger of underemployment …

    1. Good to see you firing in the media. I note you are speaking on ethical behaviour in the public sector. The problem of the public sector based job guarantee is that it relies on a machinery that by your own admittance does not have the capacity spectrum to absorb the unemployed. But more than that the capacity spectrum also radically effects whether jobs, opportunities or red tape is created. Job cuts in the public sector have mainly been in the lower echelons. It’s a phenomenon called “bloat bumping” which I wrote about some years ago. Middle management finds it hard to sack its peers so it sacks the gardening staff. So now we have a mass of middle managers in departments whose main skill set is to ask a range of completely impractical questions. We see this most radically in the Indigenous sector where billions have been spent on the wrong people in the wrong places. Departments like DEWR and training organisations like TAFE bog down job creation and the effect is that more and more bureaucracy especially in capital cities. It is interestinig to note that DFAT have imported 50 Samoan and Tongan workers into the Robinvale fruitpicking area in a space of six months. Good luck to them and to that program. However, meanwhile DEWR has bogged down a similar scheme for Indigenous workers for three years. It is about time that bureaucrats who spend years evaluating projects with their fat cat Canberra salaries and all the perks that come with the public sector start to be confronted with the ethics of their own behaviour. It makes me sick to my stomach everytime I visit the Canberra departments who are hell bent on creating as many regulations as possible around Indigenous organisations. This is one of the reasons why I favour social entrepreneurial solutions that involve Canberra as little as possible. Much more is achieved with much less and more importantly with less grey hair created in my head.

    2. bill says:

      Thanks for the ideas Peter. You say:

      The problem of the public sector based job guarantee is that it relies on a machinery that by your own admittance does not have the capacity spectrum to absorb the unemployed. But more than that the capacity spectrum also radically effects whether jobs, opportunities or red tape is created.

      I agree that the public sector currently has a capacity problem but fixing that up should be part of the reforms necessary to implement a Job Guarantee (JG). If we can run a complex system such as immigration (passports etc); tax collection; and social security then it is clearly possible to run a JG program. Part of my talk at the Ethics in the Public Sector conference yesterday was about the need to return to a public service rather than the Government politicising and compromising its bureaucracies so that it can implement policies that are clearly against the grain of common sense and decency.

      Further, the JG approach would be financed and monitored at federal level but implemented, designed and managed at the local level. This brings the dynamic down to community level. The problem with an exclusive reliance on what you call “social entrepreneurial solutions” is that it does address the underlying cause of the labour underutilisation – which is a macroecomic failure to match overall spending with that required to buy all the goods and services that are needed to be produced if everyone is to have a job.

      You know my position on this. Small-scale local ventures which generate economic activity (social entrepreneurship) are to be commended and fostered. But when at least 1.1 million people are without enough work (50 per cent of them without any work at all) then creating 40 jobs here and 20 there based on local endeavour will never solve the problem.

      Only the Federal government, as the monopoly issuer of the currency, has the capacity to fill the spending gap that is left by private saving. The financing of any job creation scheme large enough to return us to full employment across the country has to emanate from that capacity. As long as the Federal government runs surpluses (or inadequate deficits) and thus sets the level of aggregate spending below that required to achieve full employment, full employment will evade us. No amount of social entrepreneurship (local activity) can remove an aggregate spending constraint – sorry to say.

      Once we convince the Federal government that it alone has this capacity then the organisation and implementation of a JG is another question. I favour local organisation, national financing.

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